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U.S. Strengths Buoy Consumers but Hurt Corporations With Business Abroad

By Landon Thomas Jr. January 27, 2015 8:12 pmJanuary 27, 2015 8:12 pm

What is good for the American consumer may be less so for big American companies.

For some time now, the United States stock market has been propelled forward by a domestic economy that has been growing swiftly compared with Europe, Japan and many once-buoyant emerging markets.

Yet while the American consumer may be cashing in on lower oil prices, rock-bottom interest rates and — for those planning trips to Paris and Rome — a strong dollar, a growing number of big American multinational companies have begun to suffer from these very same trends.

On Tuesday, Procter & Gamble and Caterpillar, which export many of their products overseas, blamed a weak global economy and a too-strong dollar for their disappointing earnings. A day earlier, Microsoft had also cited a robust dollar for its slack results. The dollar index, which measures the value of the dollar against six other major currencies, is up 17.7 percent since June 30.

Stocks fell sharply across the board on Tuesday, although the major market measures recovered some lost ground by the end of the day. The benchmark Standard & Poor’s 500-stock index closed down 1.3 percent. The Dow Jones industrial average ended down 1.7 percent, and the technology-heavy Nasdaq composite index ended down 1.9 percent.

Although they were among the poorest performers on the day, technology stocks received a pick-me-up after the market closed. Shares of Yahoo surged in after-hours trading after the company revealed its plan to spin off its stake in Alibaba, while Apple shares jumped after the company reported impressive quarterly results.

Still, European bonds faltered as worries mounted that a radical new Greek government might ignite a new crisis in Europe over what to do about Greece’s debt.

More broadly, though, analysts say that the roster of American companies that will see a weaker bottom line this year is rapidly growing and it will include major oil companies, hurt by lower oil prices, and commercial banks that are experiencing squeezed margins from lower interest rates.

“If you put all this together, you have some issues for earnings,” said Ed Yardeni, an independent market strategist. “I am going to be lowering my earnings estimates for companies in the S.&P. for this year and next and I am not going to be alone.”

Mr. Yardeni has been one of the more prominent stock market bulls, arguing since the early days of the financial crisis that the strong performance of the United States economy — and its large companies in particular — could overcome numerous global worries, including anxiety in emerging markets and what he calls the euro mess.

But as many other economists have, he has also pointed out that while the United States is not an export-driven economy, many of its largest companies rely heavily on outside markets and they will inevitably be hurt by a stronger dollar and global stagnation.

Last week, the outlook brightened a bit after the European Central Bank announced that it would start buying government bonds in a bold move to stimulate the economy. Now some economists are warning that the E.C.B.’s program may be too little too late.

The benefits of such central bank interventions are “diminishing,” economists at HSBC Bank in London said in a recent note. Instead, the report argued, major economies should engage in “fiscal activism” to jump-start growth.

The newly formed government in Greece — headlined by a finance minister known for his unconventional views — is also giving investors pause.

Greek bond yields spiked on Tuesday and bank stocks plunged by as much as 18 percent over concerns about deposits once again fleeing the country.

Nevertheless, bond investors warn that this sentiment could change quickly if large companies, hurt by lower oil prices and a stronger dollar, have to start laying off employees to compensate for shrinking margins.

While many companies, like Microsoft and IBM, for example, have been laying off workers as part of broad strategic shifts, economists point to expected job losses in oil-dependent states, including Texas, Oklahoma and North and South Dakota, as emblematic of this shift.

Moreover, they say, stagnation in Europe and a tumbling euro could send many overseas investors rushing into United States Treasury securities, whose yields, which move in the opposite direction from their prices — have tumbled sharply over the past year. On Tuesday, Treasury prices rallied early before retreating. The yield on the benchmark 10-year Treasury note ended at 1.823 percent, little changed from 1.824 percent on Monday. (An auction for two-year notes was rescheduled for Wednesday because of the winter storm in the Northeast.)

Economists refer to this type of investor activity as safe-haven investing and it has been a major factor in growth-challenged countries like Switzerland, Japan and even Germany, where government bond yields are now in negative territory.

“It’s a fear trade,” said Jeffrey J. Sherman, a portfolio manager at DoubleLine, a large investment management firm based in Los Angeles. “If the bond market rallies, this creates negative sentiment and exacerbates this feeling that the U.S. is going to slow down as well.”

Mr. Sherman said that the double-whammy of low oil prices and a stronger dollar is going to hurt American companies more than it will help consumers, especially if, over time, companies delay investments and resort to layoffs.

In such a global environment, with Japan and Europe stagnating and companies in the United States retrenching, Mr. Sherman is betting that the Federal Reserve will back off from raising interest rates.

“If they do, we will get a recession,” he said.

A version of this article appears in print on 01/28/2015, on page B1 of the NewYork edition with the headline: U.S. Vigor Is Becoming a Weakness for Industry.